Performance Flashcards
What are the 4 indicators of economic performance, and how they are measured?
Economic growth (sustained) - real GDP/GNP
Price Stability - CPI, GPL
Full employment - Unemployment rate
Balance of Payments - BoP position
What is the definition of GDP?
The value of all final goods and services produced within the geographical boundaries of a country during a given period of time
What about the definition of GNP? Application to SG?
GDP + net factor from abroad, especially applicable to open economy like Singapore, since people work overseas, invest overseas - GNP value significantly larger than GDP value
Formula for real GDP growth rate?
(Real GDP this year - Real GDP last year)/Real GDP last year * 100%
Formula for real GDP?
Nominal GDP * (CPI base year/CPI current year)
What are 2 implications of real GDP growth rate?
Rise in material Standard of Living
Increased output –> increased employment
Relevance of real GDP per head to economic performance?
Proxy for productivity level
Limitations of real GDP growth rate?
Does not accurately reflect consumption levels in a country: Does not account for non-market activities, does not account for underground economies
What is price stability?
Low and stable inflation rate, measured with CPI –> GPL
Definition of CPI?
Measures the price of a fixed basket of goods and services typically purchased by a typical household
Formula for inflation rate?
(CPI this year - CPI last year)/CPI last year * 100%
Implications of price stability?
Advantages: Lower Cost of Living, Indirect effect on performance, since high inflation encourages imports, discourages imports, X-M falls, affects confidence in economy, investment falls, thus AD falls –> affects growth negatively
Limitations of CPI?
Substitution bias - CPI does not take into account consumers switching to less expensive substitutes when price of goods rises
New products - consumers have option of switching to new goods, spending less to maintain standard of living, but new products are not immediately included in fixed basket
How is full employment measured?
Employment rate
Definition of full employment
When all those who are able and willing to work have gained employment -
but unemployment rate need not be 0%, since frictional and structural employment can still occur
Formula for unemployment rate?
Number of unemployed/labour force
Implications of low unemployment/full employment?
If low -not likely to be cyclical unemployment. Economy is healthy. Low unemployment - maximises use of scarce resources - more production, higher actual growth
Limitations of employment as an indicator
Limitations on SoL: Does not take into account dependents, jobs may go to foreign workers.
Change in unemployment rate may result from change in the size of the workforce
People discouraged, retire, go for training, stop looking for jobs and leave labour force. Lowers unemployment rate, but does not imply better utilization of resources
Favourable Balance of Payments position - what is the definition of BoP?
A record of a country’s international transactions which involve flows of money between residents of a country and the rest of the world
What is a favourable BoP position?
Avoidance of large/persistent BoP deficit, or improved BoP surplus
What is in the current account?
Comprises trade balance and income balance
Trade balance - imports vs exports
Income balance - wages, interest, profits, transfers flowing in and out of the country
What is in the capital account?
Records changes in ownership of assets - acquisition of overseas assets are recorded as credit items, acquisition of local assets by foreigners recorded as debit items. FDI, portfolio investment included
Reserve assets account
Records international transactions made by the monetary authorities specifically for the purpose of financing the overall balance of the BOP. The official foreign reserves is the amount of foreign currencies held by the central bank.
How to calculate BOP position?
CA - KA + Net errors and omissions
Implications of BOP position?
If there is a deficit:
CA deficit - TR from X < T spending on M, X-M falls, AD falls, NY falls.
KA falls: FDI falls –> AD falls, NY falls
Overall Deficit –> exchange rate depreciates as demand for country’s currency falls, if keeps depreciating, loss of confidence, investment falls, NY falls
